Marks and Spencer plc (Appellants) v Her Majesty's Commissioners of Customs and Excise (Respondents)

Where domestic legislation maintains a permitted VAT exemption with refund of input tax, the trader has no directly enforceable right under the relevant directive to zero-rating. The domestic scheme must nevertheless comply with the principles of equal treatment and fiscal neutrality.

A defence of unjust enrichment is compatible with EU law in principle. Fiscal neutrality precludes its application to payment traders but not repayment traders marketing similar goods. The national court should ordinarily remedy that discrimination by ordering full repayment, unless national law supplies another effective and equal remedy.

Marks and Spencer plc sought repayment of VAT wrongly charged on chocolate-covered teacakes. The Commissioners accepted that the goods should have been zero-rated but resisted most of the claim under section 80(3) of the Value Added Tax Act 1994, contending that repayment would unjustly enrich the trader. Retrospective limitation legislation also affected the claim.

Following earlier domestic proceedings and two references to the Court of Justice, the Court of Appeal rejected the teacakes claim in [2003] EWCA Civ 1448, reported at [2004] STC 1. The House referred five questions concerning zero-rating, fiscal neutrality, unequal treatment of payment and repayment traders, unjust enrichment and the appropriate remedy.

After the Court of Justice answered those questions, the Commissioners accepted that the unequal treatment applied to the claim, paid the disputed amount and did not pursue any alternative remedy. The remaining issue was the formal disposal of the appeal.

1. Appeal allowed unanimously. Lord Walker of Gestingthorpe delivered the substantive opinion. Lord Hoffmann and Lord Scott of Foscote agreed that the appeal should be disposed of by the order proposed in paragraph 23.

2. Per Lord Walker, reporting and giving effect to the Court of Justice's answers, article 28(2)(a) of the Sixth Directive permitted zero-rating as a derogation but did not require it. A trader therefore obtained no directly enforceable right under that provision to be taxed at a zero rate. Article 12(1) gave no further assistance.

3. National legislation maintaining an exemption with refund of input tax nevertheless had to comply with EU law throughout the relevant period. In particular, it had to respect fiscal neutrality, which reflects the general principle of equal treatment within the VAT system.

4. A rule refusing repayment to prevent a trader's unjust enrichment was compatible with EU law in principle. The existence and extent of enrichment required a full economic analysis by the national court. The rule infringed fiscal neutrality, however, if it applied to payment traders but not repayment traders marketing similar goods. The Commissioners accepted that this discriminatory difference existed because a repayment trader sold comparable chocolate-covered teacakes.

5. The existence of discrimination did not depend upon proof that the payment trader had suffered financial loss or disadvantage. The national court had to provide an effective remedy consistently with equal treatment. Ordinarily it should order repayment in full, even if that enriched the claimant, unless national law provided another means of remedying the discrimination.

6. The Commissioners had satisfied the disputed teacakes claim and did not contend for an alternative remedy. The House therefore allowed the appeal from the Court of Appeal's order dated 21 October 2003 and invited any submissions on costs within 14 days.

1. House of Lords: Allowed the appeal unanimously from the Court of Appeal's order dated 21 October 2003, following answers supplied on a second reference to the Court of Justice.

2. Court of Appeal: In [2003] EWCA Civ 1448, reported at [2004] STC 1, held that the teacakes claim disclosed no directly enforceable EU right and was barred by the retrospective time limit.

3. Court of Justice: On the first reference, rejected the domestic distinction between VAT incorrectly transposed and correctly transposed legislation incorrectly applied. On the second reference, held that fiscal neutrality prohibited applying the unjust-enrichment defence unequally to comparable payment and repayment traders.

4. Earlier Court of Appeal: In [2000] STC 16, rejected the teacakes challenge and referred the early-voucher issue to the Court of Justice.

5. High Court: Moses J decided the claims at first instance in [1999] STC 205.